South of the border

Sunday, May 19, 2013

Mexico, once again, becomes attractive to U.S. shippers.

By Jon Ross

In today’s burgeoning trade between the United States and Mexico, a business that reached nearly $500 billion in 2012, a change in perception is taking place.
No longer is “Made in Mexico” a phrase never to be uttered. American consumers and shippers alike are starting to see the country as the next great manufacturing stronghold.
For Foster Finley, managing director in AlixPartners’ performance improvement practice, the current trade dynamic between the United States and Mexico mirrors the Japanese-U.S. trade relationship that evolved more than four decades ago.
In the early 1970s, consumers in the United States scoffed at products imported from Japan, where labor was plentiful and the cost of doing business remained cheap. Americans didn’t want to use the products, which they considered inferior, and shippers didn’t want to be associated with the area. By the end of the decade, however, Japanese goods had become desirable, he said.
Finley sees American manufacturers’ growing reliance on cheap Mexican labor, the country’s close proximity to the United States, and the continued jettison of manufacturers from Asia and other parts of the world to Mexico as hallmarks of a sustained, healthy industry.
The “long, fairly justified perception” that only inferior goods came from Mexico is currently being erased, Finley said.
“It’s looked at as a very vibrant, very reliable, very economical source of goods bound for the U.S. market,” he said. “Ten, 15 years ago, it might have been laughable or a little extreme to expect high-tech electronics, medical devices and things like that to be coming north from Mexico into the United States. It’s very common now.”
Underlying Finley’s point was President Obama’s early May trip to Mexico City to talk about a range of issues with newly-elected President Enrique Pena Nieto. Obama came back from his visit with a commitment to strengthening the trade bond between the two nations, which was started nearly two decades ago through the North American Free Trade Agreement.
During the meeting, the two presidents agreed to form a High-Level Economic Dialogue. The group, which will meet for the first time this fall, is intended to focus on job growth promotion, economic prosperity and increased competition.
Obama hopes to significantly increase two-way goods trade between the countries. While exports from the United States to Mexico stood at $216.3 billion in 2012, the real growth trend is in imports from Mexico, which saw a 106.3-percent rise last year when compared to a decade ago.
“We’ve seen continuous year-on-year increases, not only within the same (tariff) category… but there’s also been a big increase in the number of categories that are crossing the border,” Finley said.
Electrical machinery and vehicles stood as the top import categories in 2012, totaling $56.8 billion and $53.5 billion, respectively, according to the Office of the U.S. Trade Representative. Data from the Commerce Department pegs U.S. imports for the first three months of 2013 at $66.7 billion — a total that is outpacing exports by more than 13 percent.
While automotive trade between the neighboring countries leads the way, chemical shipping has been steadily increasing the past few years after a sharp drop in activity in 2009. Overall, two-way chemical trade has grown by 144 percent in the last decade, ending 2012 at $27.5 billion. Reversing the trend seen in other industries, most of the activity comes on the U.S. export-side, where activity outweighs imports by a ratio of 5:1, according to the American Chemistry Council. This activity comes in the form of bulk petrochemicals, intermediates and plastic resins.
“The trend in rising exports to Mexico is expected to continue, and especially so in the bulk petrochemicals and intermediates sector, and the petrochemical derivatives sector,” according to a statement from the council.
Kevin Sterling of BB&T Capital Markets wrote in a recent analysis that Mexico’s auto production is fueling trade with the United States. He pointed to increased Chinese labor costs, cheap transportation and the amount of skilled labor in Mexico as factors driving this trend. He also said this trade is likely to keep growing at a rapid pace as Audi, Honda, Nissan and Mazda have plans to open plants in the country in 2014.
The ramp up in import and export activity hasn’t happened overnight. The Mexican government has encouraged large investments in infrastructure, making the country a well-connected place to do business, and companies have either started opening new facilities there instead of expanding elsewhere around the world or have gone all-in with Mexico. This trend of near-shoring has impacted global trade lanes — air cargo from Asia to the United States is limping along— but the new dynamic has proved economical for the U.S. economy and its major manufacturers.
Finley characterized Mexico as a growing market with substantial infrastructure investment. There are six to eight major border crossings that see significant trade volume and have seen increased investment, and money has been spent on upgrading highways and railways.
In addition, Mexico is simply starting to look more attractive to shippers than traditional manufacturing havens. Geographic proximity is a huge bonus because, in addition to simply saving money on the actual transport, shippers can cut down inventories due to speed to market. Also it’s vastly easier, Finley said, to correct for hitches in cross-border trucking than to problem-solve challenges that arise on an ocean vessel coming from China.
Troy Ryley, director of Transplace’s Mexico service, helped start the logistics services provider’s operation in the country six years ago. The traditional cross-border procedure then was quite complex. Shippers had to contract both U.S. and Mexican customs brokers, truckers in both countries, a crossing agent and a U.S. forwarder. It was a huge hassle, Ryley explained, and clients that didn’t have a sophisticated infrastructure were completely lost.
In recent years, many of these processes have been simplified through government intervention, outside investment, the growing number of shippers in Mexico and NAFTA. Ryley expects that shipping from Mexico will become increasingly efficient between the countries’ shippers.
“I think it’s reached a tipping point,” he said. “It’s always been popular for companies to source some merchandise, but due to the recession and other factors — the speed to market, the ability to reduce your cash cycles from order shipment to final client receipt and payment — it all becomes much simpler as you bring your production closer to the U.S.”
Shippers, at the same time, are realizing that doing business from China is becoming more difficult and expensive with rising labor and fuel costs.
“There’s increased complexity as the Chinese market continues to mature,” he added, “which is driving more opportunity for (American) companies to move more of their global sourcing to Mexico.”
However, the big transportation challenge that remains is the trade imbalance between the two countries. The United States receives more than it gives to Mexico, and this causes an equipment imbalance on a trade lane where 80 percent of the goods that flow across the border are trucked.
Southbound from the United States, most trucks are carrying merchandise and food to Mexico, whereas northbound freight involves mostly production material. The problem is that during peak shipping seasons, there could be one southbound trailer for every two to four northbound trailers. This has not only led to a bigger push for intermodal and rail traffic, but also a greater need for efficiency and freight consolidation.
To make up for a lack of available equipment, Transplace may take a heavy shipment from a tile company, combine the load with a lighter, bulkier shipment of refrigerators, and cut the needed space by 15 percent by consolidating the two cargoes together.
“Those types of things are possible out of the Mexican market because it’s so close to the U.S. It’s much more difficult to do across provinces in China,” Ryley said. “In fact, we looked at that model in China, and we couldn’t do it.”
Land transport isn’t the only mode benefitting from Mexico’s rise in commercial popularity. Ocean shipping has seen a boost, Ryley said, from shippers who are sending components directly into Mexico from Asia. This capability became an option after continued investments in Mexican ports. Now, some Asian shippers can skip U.S. ports altogether.
Theft of trucks is a lingering problem for U.S. truckers entering Mexico. Most operators still engage in drop-and-swap transport of trailers to avoid crossing the border, Finley said.
Many shippers also remain concerned about the safety and security of their freight in Mexico. Ryley said the Mexican drug violence covered in the news doesn’t cross over much to the actual transport of cargo in the country.
“Transplace does a lot of high-value goods,” he said. “The amount of issues is minimal. During my 20-year career, I could count major issues on my hands and toes.”
Damco Mexico’s managing director Javier Garcia said security in Mexico is a big concern for many shippers, and for those companies operating far south of the border, cargo theft is a major threat. Companies that set up shop near the border risk more getting caught up in the drug trafficking violence. These security issues could lead to extra costs such as adding escorts or other security protections for shipments, Garcia said.
“You could have pilferages in warehouses in Asia, but you don’t have the challenge of having a convoy of trucks being assaulted by an armed group,” he said.
Despite the security risks, Garcia has helped Walmart, Target and other retail companies understand the benefits of sourcing products from Mexico. Some manufacturers want to consolidate their worldwide locations in Mexico and use it as a staging point to feed cargo into the United States and even Europe.
The potential downside to this robust economic growth in Mexico and an increased interest among shippers will eventually drive up labor costs, making it more expensive for shippers to do business in Mexico.
AlixPartner’s Finley doesn’t worry that the transportation boom from Mexico will slow down any time soon. This feeling is echoed in yearly surveys he conducts with manufacturers around the world. “Mexico has continued to be kind of the darling,” Finley said.

Shipper takeaways

Shippers doing business in Mexico should look at intermodal as well
as trucking because of a seasonal shortage of trucking equipment.

While most analysts think security worries about Mexico are overblown, be ready to invest more in security processes than you would in the United States.